China Longyuan Power - Project upgrade for long term earnings growth despite short term impairment losses

Patricia Yeung2 Apr 2024
  • FY23 net profit of Rmb6.2bn was below expectations, due to impairment losses
  • Average tariff for mid/long term contracts to grow by 8.5% in FY24, alleviating downward pressure on overall average tariffs
  • Increase in utilization hours and project returns after project upgrades despite impairment losses in the short term
  • Maintain BUY on H-share for attractive valuation; maintain HOLD on A-share for rich valuation; H/A TPs at HK$7.6/Rmb19.0
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China Longyuan Power (CLYP) reported 26.4% y-o-y growth in FY23 net profit to Rmb6.2bn, which was below expectations due to impairment loss of >Rmb2bn. The impairment was mainly due to the special programme of replacing smaller units of wind turbines with larger ones. During the period, the company added 4.5GW of new capacity, of which 1.56GW was wind power. New installations of solar power was strong at 2.9GW. Total power generation climbed 7.9% y-o-y. In particular, power generation from solar and other renewable energy jumped around 160% y-o-y. The 5% and 23% drop in tariff of wind and solar power respectively were larger than expected. The drop in wind tariff was due to increasing market transaction volume while the drop in solar tariff was due to more newly launched grid-parity projects. On a positive note, final DPS jumped from Rmb0.1171 in FY22 to Rmb0.223 in FY23.

To achieve the target under its 14th five year plan of adding 30GW of renewable capacity, CLYP has to step up new installations in these two years with an addition of capacity of 7.5GW in FY24. We conservatively assume only 7.0GW of new capacity which will bring about y-o-y growth of around 13% in power generation in FY24, up from our previous projection of 8.5%.

Although the drop in average tariff in FY23 was larger than expected, we are pleased to learn that average tariff for spot transactions was at a slight premium to benchmark tariff. In addition, CLYP is able to register an 8.5% increase in the average tariff of mid to long term yearly contract in FY24, where contracted volume is around 17bn kWh. Higher average tariff is due to increased volume in inter-province transactions. We expect more inter-province transactions will also raise CLYP’s average tariff for monthly contracted volume. As we discussed in our previous sector report, we expect increasing inter-province transactions and green electricity trading will help alleviate the downward pressure on electricity tariffs. Thus, we maintain our assumption of a 3% y-o-y drop in average tariff in FY24.

In 2023, the government released a policy to encourage replacement of those wind turbines that have been in operation for over 15 years or with capacity of <1.5MW. After reviewing its project portfolio, CLYP has identified projects with total capacity of 12GW that are qualified for the upgrade. CLYP plans to upgrade 1.23GW of wind farms in FY24/25, of which impairment of Rmb1.5bn was made in FY23. Management does not intend to make any impairment in FY24 and we have not factored in any impairment in FY25 as well. Note that 30MW of wind farms has been put on trial for upgrades earlier and improvement in efficiency of these wind farms has been satisfactory with higher utilization hours. In some cases, utilization hours had increased by as much as 25%, or reached as high as 3,700 hours. Although impairment will hurt short term profitability with high volatility in earnings growth rate, project upgrade will be positive for long term earnings growth with higher gross margin.

We have nudged up our FY24/25 earnings forecasts by 4%/6%. After the revision, we estimate FY24/25F earnings growth will be 46%/12%. Stripping out the impairment losses, FY24 growth rate will be lower at around 9%. Major swing factor is management ‘s timeline to replace smaller units of wind turbines. We reckon CLYP’s current valuation is attractive at <5x FY24 PE given its leading market position. CLYP is also in the best position to benefit from government’s policy on enhancing inter-province trading. We maintain our BUY/HOLD rating for H/A shares. H-share TP is nudged up to HK$7.60, based on 6x 12-month rolling PE. A-share TP is raised from Rmb11.7 to Rmb19.0, based on 17x 12-month rolling PE. Both target PEs are equivalent to around 1SD below its long term historical average.



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